Get ready to pay more for third-party motor insurance

The premiums for third-party motor insurance may rise by 50-80 per cent this year.

This is part of a new system under which third-party motor insurance premiums will be reset every year on the basis of a new index the Insurance Regulatory and Development Authority (Irda) is planning to construct. This means insurers will not have to negotiate with transport unions every time they want to raise rates.

Third-party motor insurance premiums in India are regulated by a constitutional body -the Tariff Advisory Committee (TAC) - under Irda.

TAC has failed to increase premiums for the last four years due to opposition from transport unions.

This has resulted in general insurance companies accumulating a loss of Rs 3,500-5,000 crore, which is affecting their solvency margins. Solvency margin is the extra capital an insurance company is required to hold and determines its ability to settle claims.

The index would take into consideration factors such as minimum wages, cost of living and key drivers of the claim cost like the income of the claimant.

"The index will take into account all the elements that can affect the claim cost.

Once the index is ready, all stakeholders - insurers, Irda, the government and transport unions - will meet at the end of the year to revise the rates on the basis of changes in the index," said an official close to the development.

Earlier this week, Irda and general insurers met transport unions in Hyderabad to discuss an increase in rates.

"According to the new calculations, the loss ratio for third-party motor insurance is around 180 per cent and the total accumulated losses could go up to Rs 5,000 crore (Rs 50 billion) by the end of this financial year. The minimum increase required to offset this loss is 80 per cent," said an official of a general insurance company.

Motor is the largest line of business for general insurance companies and accounts for around 43 of their premium income.

Last week, Minister of State for Finance N N Meena said the government had approved the proposed increase in motor insurance premium as general insurers could incur a loss of about Rs 3,500 crore (Rs 35 billion) in the current financial year in the segment.

"If the situation was allowed to continue, there would be a severe dent on the solvency and liquidity of insurance companies," he said.